Lease option to owner in foreclosure - Posted by Mike

Posted by JPiper on December 21, 2000 at 23:15:17:

Eric:

The last place I would go if I wanted to know something about lease/options would be to Bill Gatten’s site. I would go to Bill Gatten’s site if I wanted to learn about PacTrust.

This thread however was not about the viability of lease/options in California. This thread was regarding the wisdom of lease/optioning a property back to an owner who was in foreclosure in the state of California. That’s a specific case, and doesn’t necessarily carry implications regarding lease/options in general.

As I stated above, anyone doing a transaction with an owner in foreclosure in California would be well-advised to know the law…and to have consulted with an experienced attorney regarding their plans. This would be true if you were doing lease/options, PacTrust, or any other type of transaction with an owner in foreclosure.

If you want additional information regarding lease/options I would recommend Bill Bronchick’s course.

JPiper

Lease option to owner in foreclosure - Posted by Mike

Posted by Mike on December 20, 2000 at 22:05:13:

I got a call today about a house in foreclosure- the owner is willing to give away substantial equity in the house if I bring the loan current and lease option back to him. I have heard there might be legal problems doing this in Califonrnia but this is a great deal I don’t want to miss on. Any ideas would be appreciated.

Re: Lease option to owner in foreclosure - Posted by JPiper

Posted by JPiper on December 21, 2000 at 13:47:59:

I think Nate below gives you some good advise.

My suggestion to you would be to familiarize yourself with the California laws concerning “equity purchasers”, “equity sellers”, and “foreclosure consultants” for properties that are in foreclosure.

In particular I would suggest that you do some reading at findlaw.com. Click on the state section and go to California. There I would search out California Civil Code Section 1695-1695.17. A violation of this act can result in some very severe penalties, both financial and criminal.

Here’s part of those sections:

1695.12. In any transaction in which an equity seller purports to grant a residence in foreclosure to an equity purchaser by any instrument which appears to be an absolute conveyance and reserves to himself or herself or is given by the equity purchaser an option to repurchase, such transaction shall create a presumption affecting the burden of proof, which may be overcome by clear and convincing evidence to the contrary that the transaction is a loan transaction, and the purported absolute conveyance is a mortgage; however, such presumption shall not apply to a bona fide purchaser or encumbrancer for value without notice of a violation of this chapter, and knowledge on the part of any such person or entity that the property was “residential real property in foreclosure” shall not constitute notice of a violation of this chapter. This section shall not be deemed to abrogate any duty of inquiry which exists as to rights or interests of persons in possession of the residential real property in foreclosure.

1695.13. It is unlawful for any person to initiate, enter into, negotiate, or consummate any transaction involving residential real property in foreclosure, as defined in Section 1695.1, if such person, by the terms of such transaction, takes unconscionable advantage of the property owner in foreclosure.

Obviously a leaseback falls squarely within this act. Further, ANY transaction done on a property in foreclosure falls under this act as well…to include the PacTrust. All require you to meet the requirements of the act. After you have read this information my best advice would be to get with an attorney in California who is familiar with the foreclosure laws there to make sure you are not placing yourself in a vulnerable position.

Personally, I would not consider doing a lease/option back to the seller in California. My view would be to acquire the property and have the seller move on. But there is also case law in California concerning a lease/back situation where the investor was taken to the cleaners…unfortunately I don’t remember the name of the case. For some reason the name Onofrio sticks in the back of my mind, but that may be an old memory acting up too.

JPiper

Re: Lease option to owner in foreclosure - Posted by dewCO

Posted by dewCO on December 21, 2000 at 09:14:52:

It’s not only a foreclosure consultant issue, I’m told it’s their consumer protectin laws. You can’t “unjustly” gain beause of someone else’s misfortune, but don’t know the legal language. that’s one reason that Joe Kaiser recommends never taking more than 50% of the value of the property. IF there’s more equity than that he shares it with the seller/owner I believe. Can’t site the statute to you in Calif. law, but it exists. You might look at the PACTrust as a means of avoiding this issue, at
www.cal-equity.com.

Re: Lease option to owner in foreclosure - Posted by Nate

Posted by Nate on December 20, 2000 at 23:24:33:

Disclosure: I Am Not A Lawyer. I also am not in California and have no first hand experience. What I am about to relate is only garnered from other messages on this board!!

I have read other messages here telling of people who did get into trouble in California for doing this (or something similar) because of a state law regulating “foreclosure consultants”. Apparently, it is fairly easy to unintentionally be considered a “foreclosure consultant” under the law by doing things such as helping someone in foreclosure refinance, buying their house and lease-optioning back to them, etc etc. I do not know the law but would highly recommend you see if you can find an attorney who does know about it because it seems the likelihood was real of unintentionally doing something which resulted in a huge liability.

Re: Lease option to owner in foreclosure - Posted by Irwin(CA)

Posted by Irwin(CA) on December 21, 2000 at 18:42:22:

Jim,

You’re absolutely right. California has some tough rules so if you want to play the foreclosure game, you have to learn and play by the rules. Semantic chicanery won’t suffice.

By the way the case you’re referring to can be found at:
http://www.calpost.com/Library/Cameron/cameron1.htm

Irwin

CA Lease Options - Posted by Eric(ca)

Posted by Eric(ca) on December 21, 2000 at 22:41:49:

So what I’ve been reading about lease options in California are true about them not being done in the traditional way and holding up in court? I refer to Bill Gatten’s site as an example. He has an article written by someone citing that lease options cannot hold up in court when you allow someone to have part of their “rent” payment applied to equity, lest they actually establish and equitable partnership in the deal.

Can you please shed some light on this? What do you do to get around it?

Re: CA Lease Options - Posted by Irwin(CA)

Posted by Irwin(CA) on December 22, 2000 at 13:14:20:

Eric,

My response applied to LO’s for owners in foreclosure and not to LO’s in general. Reading the law would probably be a good idea.

Irwin

Re: CA Lease Options - Posted by JohnBoy

Posted by JohnBoy on December 22, 2000 at 09:15:06:

Another point to consider about doing a L/O regardless of where you are is that your contracts should not state any rent credits being applied towards any “equity” in the property. If you give rent credits they should be applied against the “purchase price”, not equity.

If you applied it to “equity” then that might be considered SELLING a portion of the property to the tenant. However, if you applied it towards the “purchace price”, then that only means you agree to LOWER the original price IF the tenant were to exercise their OPTION.

Selling off part of the equity vs. reducing the purchase price is a big difference.